Pre-salt legislation puts Petrobras centre stage

Sep 26, 2009 02:00 AM

President Luiz Inacio Lula da Silva has put four laws before Congress that will give Petrobras control over the
country's coveted pre-salt acreage and significantly reduce the private-sector's role.
Some politicians and media commentators have criticised the proposed legislative changes, likening them to the
counter-productive form of resource nationalism that has occurred in some parts of the world.

But this is a simplistic view. There's good resource nationalism and less good. The less good type deprives its
country of practical economic or technological solutions for developing its resources (Venezuela, for example). And
it sets down a political marker that makes companies wary of future investment offers (Russia, for example).
The good type balances the country's need for money and technology from outside with the government's duty to
generate maximum value from its resources.

Brazil's government has struck a sensible balance. High-risk exploration acreage has already been converted into
extensive high-reward property, but the government has resisted the temptation to force investors to renegotiate
contracts to the state's advantage, as Venezuela has done in the recent past: existing pre-salt licences will not be
affected by the changes.
That is excellent news for the handful of companies -- notably Repsol and BG -- with pre-salt licences and reserves
to develop. But it also enhances Brazil's growing reputation for political stability and should encourage long-term
investment.

Second, Petrobras's technology and project-development skills make it more capable than any other national oil
company (NOC) of developing Brazil's offshore resources. Gazprom, for example, also wants to exploit its offshore
potential, but, unlike Petrobras, doesn't have the technology: as a result, the Russian company is turning once again
to foreign investors, hoping they will overlook Russia's negotiable stance on contract sanctity.
Similarly, Venezuela can't rely on its NOC in the same way Brazil can. The sacking of 19,000 PdVSA employees in 2002
has prevented Venezuelan oil production from rising as the government would like.

Petrobras has always had political objectives to accomplish -- creating employment, stimulating economic growth, and
supplying energy to the local market, for instance. But mostly it has been left alone to get on with the job -- and
hasn't had the social-funding commitments of, say, PdVSA or Mexico's Pemex.
There is plenty of evidence that Petrobras can, as it has repeatedly claimed, develop Brazil's pre-salt reserves
itself. When it was founded, in 1953, Brazil was oil deficient. The government granted Petrobras production of 2,700
bpd and reserves of 15 mm barrels, but domestic consumption amounted to 137,000 bpd. It hoped to reduce the deficit
through onshore exploration. When that aim proved unrealistic, it built an offshore industry from scratch. Petrobras
-- helped, certainly, by contributions from international oil companies (IOCs) since the upstream liberalisation of
the late 1990s -- is now producing nearly 2 mm bpd of crude and is a net exporter of oil.

While IOCs have excelled offshore West Africa -- particularly in Angola -- their record in Brazil's deep waters is no
match for Petrobras's. The company established the existence of the pre-salt frontier and produced first oil from a
pre-salt zone. It discovered the Tupi field, with reserves of 5 bn-8 bn boe. It also found Guara, Iara, Jubarte,
Carioca and numerous other fields.
While the Brazilian firm has found hydrocarbons with all 11 wells it has drilled so far in the Santos basin,
ExxonMobil's Guarani sub-salt exploration well, estimated to have cost $ 140 mm, came up dry (Petrobras was among the
partners, but not operator).

Petrobras has also proved resourceful at raising financing. Earlier this year, for example, it signed an agreement
with China Development Bank under which it will receive a 10-year loan worth $ 10 bn in exchange for the promise of
future oil supplies. In conjunction with the rise in oil prices since the depths of the recession, the government's
plan to recapitalise Petrobras, increasing its shareholding in the process, will alleviate immediate funding
concerns. But should private-sector investment dry up, China and India will be willing to step in.
If a state-controlled entity can develop Brazil's oil itself, then outsourcing the job would not make sense. In this
respect, Brazil has another advantage over many other resource-rich countries: the oil sector is important, but not
excessively so. It accounts for 10 % of Brazil's GDP and 6.5 % of exports.

Slowing down oil development, which is what the government is effectively doing by handing such a central role to a
single company, will not destabilise the economy as it might in, say, Venezuela, where oil accounts for more than
three-quarters of export revenues, half of total government revenues, and a third of GDP.
Yet even with Petrobras controlling Brazil's pre-salt areas, upstream growth is set to be quick. Within a decade --
based on exploration results to date -- Petrobras expects to be producing 1.8 mm bpd from pre-salt areas, almost
doubling domestic production. Its main risk will be coping with such a heavy workload, and sourcing enough
well-trained people to manage the projects and develop its technology.

The International Affairs Institute (IAI) and OCP Policy Center recently launched a new book: The Future of Natural Gas. Markets and Geopolitics.

The book is an in-depth analysis of some of the fastest moving gas markets, attempting to define the trends of a resource that will have a decisive role in shaping the global economy and modelling the geopolitical dynamics in the next decades.

Some of the top scholars in the energy sector have contributed to this volume such as Gonzalo Escribano, Director Energy and Climate Change Programme, Elcano Royal Institute, Madrid, Coby van der Linde, Director Clingendael International Energy Programme, The Hague and Houda Ben Jannet Allal, General Director Observatoire Méditerranéen de l’Energie (OME), Paris.

For only €32.50 you have your own copy of The Future of Natural Gas. Markets and Geopolitics. Click here to order now!